Why Life Insurance?
When buying life insurance, an Insured amount (death benefit) is paid out to the beneficiary upon the death of the insured. The policyholder pays a regular amount, called premium, to receive the coverage. These premiums are based on factors, such as age, gender, medical history, and the amount of life insurance you purchase.
In case something unfortunate happens to the insured, the life insurance will provide money directly to the beneficiaries. A life insurance doesn’t only provide protection, but also is a form of financial Planning. Beneficiaries could use the money for:
1. Making up for your lost income
2. Funding a child’s education
3. Paying off household debt
Certain types of life insurance may provide financial benefits for you and your family while you are still living. Some life insurance policies will offer a payout upon maturity or when surrendering. However, the different types of life insurance are priced differently.
The main categories of life insurance
In general, they are divided into three broad categories:
Term Life Insurance:
A term life insurance offers coverage for a chosen period. This type of life insurance pays out to the beneficiary only if the insured dies within the chosen period. The policy will lapse if the policyholder stops paying premiums. Term life insurance is comparatively more affordable because it doesn’t offer any maturity payout.
A term life insurance is an ideal choice for those who need to protect their family from financial risks over a specific period of time, such as during loan repayment.
Permanent Life Insurance:
This type of insurance offers coverage for the whole life of the insured. The policyholderMust/is required to pay premium either for a specific time period or throughout their lifetime. This insurance pays out to the beneficiary upon the insured’s death. This life insurance also offers a surrender value, if the policyholder chooses to lapse the policy before its maturity.
Some permanent life insurance policies offer regular pension payouts, which can be received monthly, quarterly, semi-annually, or annually after a certain period.
Endowment Life Insurance:
This insurance ‘combines features’ of term life and permanent life insurance. It provides coverage over a specific period, while offering surrender and maturity benefits. You will receive a lump sum payout at the end of a chosen period. Some policyholders use this kind of policy to save a specific sum for their children’s higher education.
How much life insurance do I need?
Your goal should be to develop a life insurance plan that compensates your family for the loss of your income after your death. Below are two ways to determine how much life insurance you may need.
Calculate the replacement income need.
This method helps to determine the financial contribution you will make to your family from now until you retire. This amount helps in determining how much life insurance you will need. It calculates more than just replacing your income, as it also considers everything you provide to your family, including:
1. Salary
2. Health Insurance
3. Retirement savings
4. Personal services you perform for your family, such as childcare, cooking, home maintenance
5. Your personal consumption – annual spending on personal needs, such as food, clothing, entertainment
Survivor needs analysis.
This method calculates the amount of income that is needed for your surviving spouse and children to maintain their desired level lifestyle. Your family’s needs are then compared to their assets, existing life insurance and other income sources to determine any additional life insurance requirements. An insurance agent or financial advisor can help you determine an accurate figure and choose appropriate coverage.
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